How Market Research Works

You are currently working for someone else, and you have an idea for a new product or service.

You own a small business and you have been successful with your first product or service. Now you have an idea for a new product.

You work for a large corporation, and the product that you manage has started to lose sales even though the market appears to be growing.

In situation #1, the question you are asking yourself is, "Should I quit my job and start a new business to sell this product?" The sub-question is "Will this idea work?" If the idea is going to work, and you can make a significant profit by starting the business and selling the product, then starting the new business is something you should consider. If not, then starting a new business is the wrong decision. To start your new business, you will need to quit your job, get a second mortgage on the house, work incredibly hard getting everything going and so on. If the idea does not work after doing all of that, it will be a major disappointment and a big financial loss.

In situation #2, the scenario is similar. Your small business is up and running and making a profit. Should you risk that profit on a new product? Is it worth it to invest the profit in this new product, or should you put the profit in the bank and wait for a better idea?

In situation #3, you have a mystery. A product that has been working is now losing sales for some reason. Your job is to find out why so that you can correct the problem.

Somehow you need to reach out to potential customers and/or current customers and find out what they are thinking. You need to ask questions and get some concrete answers. Do people need the product or service you are offering? If so, how many people need it? Which features are important to these people and which are not? What price would customers be willing to pay, and why?

The process that you use to get answers to questions like these is called market research. There are two ways to look at the process: From a business standpoint, market research is a way to get answers to important questions before investing a lot of time and money creating a new product or service. From a consumer standpoint, there are many people who enjoy being a part of the market research process. And they can even make a little money by participating in focus groups and surveys.

In this article, you will have the opportunity to learn about the market research process from both a business perspective and a consumer perspective.

Possibilities

Let's go back to the first situation we examined at the beginning of this article. You are currently working as an employee, and you have an idea for a new product or service. The product could be anything -- a new way to package ketchup in a grocery store, or dry granules that you can use to "wash" your car without water, or a very cute stuffed animal. How do you find out if anyone wants or needs your ketchup package, your car granules or your stuffed animals?

Short of manufacturing the new product and selling it to see how many people buy, there really are only two ways to answer marketing questions ahead of time. You can find out directly or indirectly.

Let's look at the direct way first. To find out if people like your idea, you have to talk to people and see what they are thinking and feeling. You've probably been talking to people all of your life, so you are familiar with the many different ways to reach them. You can:

No matter which technique you are using for market research, your goal is to ask a set of questions and get back: A) a set of answers to your questions, and B) new ideas. Part B is important. In many cases you learn things that you never thought about by talking to people. For example, you might find that no one in the south wants your dry car-washing granules, but in the north, where water freezes in the winter, dry granules are just what people have been looking for. If you had not realized that previously, it can be a big revelation -- it can save you a ton of money that would have been wasted advertising your granules in Florida.

The indirect way to learn about the marketplace is to look at what's already out there. How many companies are making a competing product? What are their products like? How do they market them? The fact that there is a competing product tells you that there are some customers out there, and you can access your competitor's market research by looking at the products your competitor is producing. Assuming, that is, that the competitor did any market research.

Getting Ready to Ask Questions

In this article, the author asks three very important questions about your potential product:

Who, if anyone, has a real need for the thing I propose to sell, and how many of those potential customers are there?

How much, if anything, are they spending to address that need today [and/or how much would they be willing to spend]?

Does my product meet that need in a manner that either saves or makes them substantial amounts of money?

These questions have a business focus, but they can be generalized to handle any product. For example, in question 1, no one had a "real need" for pet rocks or singing fish, yet these products sold very well. So we might expand the question to include "desires" and "whims" as well as needs.

Similarly, in question 3, people often buy things for reasons that have nothing to do with making or saving money. For example, Egyptian cotton sheets neither make or save money, but they feel good when you are falling asleep. So we can expand question #3 to say, "Does the product appeal to a customer in a way that would cause him or her to pull out the wallet?" The word "appeal" can be very broad -- everything from breast implants to chrome wheels to food processors can fall into that category.

Now that you have these three "big picture" questions in mind, you can start to think about the specific questions that you would like to ask your specific audience. Normally you come up with a set of questions that help you to understand how the audience is thinking and feeling about your product.

The goal of all of these questions is to gain intimate knowledge of your customers. You want to know exactly what they are thinking and feeling, and why.

How to Ask

Now that you have a list of questions, your job is to figure out the best way to ask them. Here are some of the possibilities:

You can call people on the phone

You can stop them on the street or at the mall.

You can send out a questionnaire (by mail or e-mail)

You can post a questionnaire on the Internet

You can assemble a group of people for a focus group

Of all of these techniques, the most familiar is probably the focus group. It happens to be the most expensive technique as well. Firms may pay participants up to $100 for participating in a focus group. The company sponsoring the group also has to pay for the space, the facilitator, refreshments, etc. The advantage of a focus group, however, is that it tends to generate lots of new ideas. It also lets people actually see and/or try out the product, and then interact with one another as they discuss their likes and dislikes.

A typical focus group will bring 10 to 15 people together in a room with a facilitator. The facilitator works with the group to answer the pertinent questions and stay on track. In many cases, the interactions between different people in the group bring out new ideas or discover concerns that might have been previously hidden.

Focus groups work, but they can be so expensive that they tend to be used more by large companies and in the latter stages of product refinement. If it costs $20,000 to get the opinions of 100 people, the price can be prohibitive. Both small companies and large companies often use less expensive techniques.

Other Alternatives

Phone calls, mailed questionnaires and online surveys all offer advantages and disadvantages for companies performing market research. For example, a company might buy a list of addresses from a magazine, and then send questionnaires to subscribers. Many magazines sell subscriber phone numbers as well. Magazines are a popular source of addresses and phone numbers because magazines tend to concentrate customers with certain interests. For example, a woodworking magazine tends to have subscribers who are woodworkers. If you want to do research on a product for woodworkers, the woodworking magazine offers you an easy way to find potential customers.

Telephone and mail surveys tend to be fairly expensive. For example, if you have to mail out 20 surveys to get 1 response, it can cost $10 to $20 per response. Telephone surveys can cost even more.

That's where the Internet fits in. By using the Internet, either in the form of e-mail surveys or online questionnaires, the cost of market research goes down. E-mail surveys now have the problem that they look and feel like spam, and are often eliminated by spam filters. That leaves online surveys as a great way to reach lots of customers. The other advantage of Internet surveys is that they can be very fast. You can post a survey and get preliminary answers within 24 hours.

The survey system now available on HowStuffWorks is typical of this form of market research. Here's how it works:

Visitors who want to be a part of the market research program sign up to participate.

They agree to follow the rules, and in return they get paid for their work ($2 per survey filled out, in this case).

When a new survey is available, the selected participants get an e-mail that tells them the URL for the survey.

Participants go read the questions and fill in their answers.

As you can imagine, this technique can generate results very quickly. Answers start coming back within minutes of posting a survey and sending out an e-mail.

By using questionnaires and focus groups, companies can gain a great deal of information during the product design process. This allows companies to increase the probability of success for any new product or service that they create.